CREDIT RATING AGENCIES, THE SUBPRIME MORTGAGE DEBACLE AND GLOBAL GOVERNANCE: THE EU STRIKES BACK

2010 ◽  
Vol 59 (3) ◽  
pp. 701-730 ◽  
Author(s):  
Harry McVea
Keyword(s):  
Global Governance ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Poor Quality ◽  
Credit Rating Agencies ◽  
Subprime Mortgage ◽  
Rating Agencies ◽  
The Global Financial Crisis ◽  
Subprime Mortgage Debacle ◽  
The Eu

AbstractThe global financial crisis has served to highlight serious weaknesses in global governance, revealing fault lines in the international financial architecture and its accompanying regulatory apparatus. Most glaringly, the spotlight has fallen on Credit Rating Agencies (CRAs)—key governance agencies in the pre-crisis domestic and international regulatory structures, and ones directly linked to the subprime mortgage debacle. The aim of this article is to provide a critical appraisal of CRAs as a mechanism of global governance in the light of their role in the subprime mortgage debacle and to evaluate the case for stricter regulation of CRAs. In this respect, special emphasis is placed on the recent EU attempt—by way of a new Regulation on Credit Rating Agencies—to bring rating agencies within the regulatory fold. It is argued that while the EU Regulation has serious implications for the operation of CRAs within the Community, the reform measure is potentially illustrative of a growing dissonance between EU and US responses to global governance issues more generally.‘[Securitisation led to the belief among many that] poor quality assets … assembled as a portfolio … could somehow by alchemy be converted into something stronger than they were’.1‘The crap had become cake.’2‘In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, like CDO tranches, rated triple A.’3

Part VII International Securities, Including Markets and Clearing Systems, 21 Credit Rating Agencies

2021 ◽  
Author(s):  
Eborall Charlotte
Keyword(s):  
Information Asymmetry ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
The United States ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Participants ◽  
The Global Financial Crisis ◽  
Independent Assessment

This chapter concentrates on credit rating agencies (CRAs), which play a key role in financial markets. It explains how CRAs help reduce information asymmetry between investors and issuers by providing an independent assessment of the relative creditworthiness of countries or companies. It also describes how CRA's role has expanded significantly in recent decades with financial globalization, such as the introduction of references to credit ratings in regulations and the embedding by market participants of ratings in their operating procedures, investment decisions, and contracts. This chapter identifies the heavy reliance on CRAs as one of the main contributors to the global financial crisis in 2008. It also talks about the efficacy of CRAs' credit ratings after 2008, in which regulators in the United States (US) and Europe introduced new regulations intended to address the reliability of CRAs' predictions of probability of default.

scholarly journals A hard nut to crack: Regulatory failure shows how rating really works

2019 ◽  
Vol 23 (3) ◽  
pp. 266-286 ◽  
Author(s):  
Giulia Mennillo ◽  
Timothy J Sinclair
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Third Party ◽  
Credit Rating Agencies ◽  
Private Goods ◽  
Rating Agencies ◽  
Rating Agency ◽  
Before And After ◽  
The Global Financial Crisis

Credit rating agencies such as Moody’s and Standard & Poor’s are key players in the governance of global financial markets. Given the very strong criticism the rating agencies faced in the wake of the global financial crisis 2008, how can we explain the puzzle of their survival? Market and regulatory reliance on ratings continues, despite the shift from a light-touch to a mandatory system of agency regulation and supervision. Drawing on the analysis of rating agency regulation in the US and the EU before and after the financial crisis, we argue that a pervasive, persistent and, in our view, erroneous understanding of rating has supported the never-ending story of rating agency authority. We show how treating ratings as metrics, private goods, and independent and neutral third-party opinions contributes to the ineffectiveness of rating agency regulation and supports the continuing authoritative standing of the credit rating agencies in market and regulatory practices.

scholarly journals Examining the Behavior of Credit Rating Agencies Post 2008 Economic Turmoil

2017 ◽  
Vol 53 (4) ◽  
pp. 61-76
Author(s):  
Çağrı L. Uslu
Keyword(s):  
Financial Crisis ◽  
Emerging Markets ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Credit Rating Agencies ◽  
Macroeconomic Variables ◽  
Rating Agencies ◽  
Macroeconomic Indicators ◽  
The Global Financial Crisis

AbstractThe demand for sovereign ratings has increased throughout last decades. Until the1990’s, credit rating agencies (CRAs) did not rate most of the emerging markets and the focus was almost only on developed countries, however, during this decade the number of sovereigns rated increased dramatically due to addition of emerging markets to the portfolio. The global financial crisis in 2008 led to the loss of credibility of these major credit rating companies. None of these three agencies showed any signal of macroeconomic problems in countries where the financial crisis created devastating macroeconomic results. It is believed that this failure has led credit rating agencies to behave more conservatively. This paper aims to determine whether CRAs tend to behave conservatively after the 2008 global financial crisis. If the downgrading is greater than the worsening of the economic situation in the given economies, then we can infer that CRAs tend to behave more conservatively. The good working model in estimating ratings assigned by CRAs before the crisis failed to estimate the ratings after 2008 crisis. This may have happened due to two reasons. First, as experienced in the aftermath of the former crisis, credit rating agencies may have added new macroeconomic variables in the process of assigning ratings or change the weight assigned to the already existing macroeconomic variables. Second, it is a known fact that ratings emerge from the combination of two distinct information; the quantitative part reflected by macroeconomic indicators and the qualitative judgements of the agency about the sovereign.

scholarly journals Credit rating agencies and moral hazard

2011 ◽  
Vol 58 (2) ◽  
pp. 219-227 ◽  
Author(s):  
Milos Bozovic ◽  
Branko Urosevic ◽  
Bosko Zivkovic
Keyword(s):  
Financial Crisis ◽  
Moral Hazard ◽  
Credit Risk ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Structured Products ◽  
The Global Financial Crisis ◽  
Financial Securities

The failure of credit rating agencies to properly assess risks of complex financial securities was instrumental in setting off the global financial crisis. This paper studies the incentives of companies and rating agencies and argues that the way the current rating market is organized may provide agencies with intrinsic disincentives to accurately report credit risk of securities they rate. Informational inefficiency is only enhanced when rating agencies function as an oligopoly or when they rate structured products. We discuss possible market and regulatory solutions to these problems.

scholarly journals Markets: The Credit Rating Agencies

2010 ◽  
Vol 24 (2) ◽  
pp. 211-226 ◽  
Author(s):  
Lawrence J White
Keyword(s):  
Credit Rating ◽  
Credit Rating Agencies ◽  
Bond Markets ◽  
Regulatory Structure ◽  
Information Process ◽  
Subprime Mortgage ◽  
Rating Agencies ◽  
History Of ◽  
Barrier To Entry ◽  
Subprime Mortgage Debacle

This paper will explore how the financial regulatory structure propelled three credit rating agencies—Moody's, Standard & Poor's (S&P), and Fitch—to the center of the U.S. bond markets—and thereby virtually guaranteed that when these rating agencies did make mistakes, these mistakes would have serious consequences for the financial sector. We begin by looking at some relevant history of the industry, including the series of events that led financial regulators to outsource their judgments to the credit rating agencies (by requiring financial institutions to use the specific bond creditworthiness information that was provided by the major rating agencies) and when the credit rating agencies shifted their business model from “investor pays” to “issuer pays.” We then look at how the credit rating industry evolved and how its interaction with regulatory authorities served as a barrier to entry. We then show how these ingredients combined to contribute to the subprime mortgage debacle and associated financial crisis. Finally, we consider two possible routes for public policy with respect to the credit rating industry: One route would tighten the regulation of the rating agencies, while the other route would reduce the required centrality of the rating agencies and thereby open up the bond information process in way that has not been possible since the 1930s.

scholarly journals The Role of Credit Rating Agencies in Sovereign Debt Markets

2018 ◽  
pp. 146-166
Author(s):  
Aline Darbellay
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Past Century ◽  
The European Union ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Since the global financial crisis of 2007-2009, the leading credit rating agencies (CRAs) have faced an increasing level of legal and regulatory scrutiny in the United States (US) and in the European Union (EU). This chapter sheds light on the promise and perils of sovereign credit ratings in the light of the European sovereign debt crisis. The leading CRAs have been blamed for providing investors with inaccurate credit ratings, facing inappropriate incentives and lack of oversight. This chapter addresses the evolving function performed by CRAs over the past century. Traditionally, CRAs are private market actors assessing the creditworthiness of borrowers and debt instruments. Since the first sovereign bond ratings assigned in 1918, the rating business has grown in size and importance. Sovereign ratings supposedly predict financial distress of governments. Their role has shifted over the last four decades. Although they have repeatedly been blamed for being poor predictors of sovereign debt crises, CRAs continue to play a key role in modern capital markets.

Sign in / Sign up

Export Citation Format

Share Document